(Stock-market peaks, throughout history and across geographies have historically, and maybe coincidentally, simultaneously occurred at the start, or completion, of a regions tallest tower. The Freedom Tower, replacing the lost World Trade Center, has just been crowned New Yorks tallest building!)
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Valuation metrics appear lofty in absolute terms. The Samp;P 500 is selling at 16.7X forward 12-month earnings, well above its historical average, and at, or above, prior market peaks.
In the past, I wouldve thought that these ominous signs were pointing to an impending market crash, a bear market, or, at the very least, the risk of a larger, and longer, than normal correction. But that may not be the case this time.
Im reminded of Stan Druckenmiller, one of the most consistently profitable hedge-fund investors in market history. He managed George Soross Quantum Fund and his own fund at Duquesne Capital. Druck, as his friends on the Street call him, is a serious student of market history and has done extensive work on the causes of bull and bear markets.
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For instance, when Long Term Capital was collapsing in the summer of 1998, Russia was simultaneously defaulting on its debt AND devaluing its currency, Stan got extremely bullish. The Read MoreFederal Reserve had slashed interest rates and coordinated an orderly wind-down of LTC. Bailouts, Stan told me, were bullish. He said the summer of 1998 was a generational buying opportunity and got long the equity market and, while he was a touch early, he made a pretty handsome return with that bold call.
Im reminded of a conversation I once had with Stan. He said bear markets are triggered by only two things: rising interest rates and/or the onset of war.
Indeed, at all the prior market peaks to which this one is being compared, interest rates were rising rapidly, sharply, or both. Such is not the case today, in fact, interest rates fall on every pullback in stocks, as opposed to moving inexorably upward as they have preceding, and during, previous equity bear markets.
Also, as far as I know, the US is not on the cusp of entering a major military conflict. (Of course, any number of geo-political hot spots could drag the US into a new conflagration, but as yet, neither the current administration, nor the American people, appear to have the appetite for a new expedition, no matter what the cause. Yesterdays intense terrorist scare in Israel is a case in point.)
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Now, I havent spoken to Stan in quite some time, so I dont know his view on the current bull market. (I did reach out to him to confirm my memory of our conversations, but as of publication time, I have not heard back.) But using his litmus tests for imminent bear markets, this peak fails to pass muster.
I have been, and remain, a firm believer that we are in the midst of a secular bull market driven by the following factors:
*A Friendly Fed
*A new energy revolution
*A manufacturing renaissance in the US
*A real-estate recovery
Many, of course, have pulled forward their expectations of a change in Fed policy to combat incipient inflation and stronger-than-expected job growth.
In my view, job growth has yet to produce the type of wage inflation that can lead to a wage/price spiral, In addition, rising prices for oil, pork, beef and coffee are not inflation in the monetary sense and, thus, the Fed has little control over drought, pig infestation, a coffee cup, or the scarcity of limes.
Monetary inflation is largely absent, both here and abroad, and wont likely appear unless the velocity of money advances and the economy grows significantly stronger.
While I am bullish on the future of the economy, I remain convinced the Fed will err on the side of caution and keep rates low until a self-sustaining recovery is a certainty, not a forecast.
Recent data are encouraging, but the bond market is not sending the typical signals it would, if inflation and growth were running away on the upside.
I acknowledge that a correction could be coming. However, I will use the opportunity to add to selected positions — average down, as they say on Wall Street. There are many bulls who are raising cash these days, which is prudent for those with a short-term time horizon, or whose portfolios are significantly overweight equities. Some investors and traders are reluctant bulls, or fully invested bears, so a cash-raising strategy is appropriate for their approach.
It has been since the end of 2012 since we have had a decline anywhere near the typical 10 to 15 percent.
However, the character of this most recent pullback is much like the February/April decline — high-beta stocks are getting beaten down, while the major averages are pulling back less dramatically. This time could be more intense, but corrections in secular bull markets are typically short, sharp and scary. I wouldnt be surprised if this one fit the bill.
I dont believe this bull market is over. If rates rise, Fed policy changes, or an unexpected war draws in the US, I would freely, and quickly, change my mind.
But my internal monologue is still dominated by the long-term bull in me. I would never say that this time is different, the over-used catch-phrase, and rationalization, of perma-bulls. But barring the necessary ingredients for the onset of a bear market, I would argue that this time is just not the same.